For the third time in two years, Moody’s, the credit ratings service, has downgraded Yeshiva University’s debt, citing the school’s deep operating deficits, weak cash flow and uncertainty about a pending $380 million lawsuit filed against it.
Just a few years ago, Moody’s gave Y.U. a healthy Aa3 credit rating.
Moody’s latest report, released October 9, rated Y.U. Baa2, the agency’s second lowest investment grade. The university’s credit rating also remains under review for further downgrade, the ratings agency reported.
Y.U.’s credit rating decline began before the filing, in July, 2013, of a $380 million lawsuit by former students of Y.U.’s Manhattan boys high school, who say Y.U. fraudulently covered up sex abuse over several decades.
But David Jacobson, a spokesman for Moody’s, said that the possibility of a multi-million-dollar settlement and the potential damage to Y.U.’s reputation from the scandal could hurt enrollment and limit donations, compounding Y.U.’s “significant fiscal issues.”
Private colleges have struggled in recent years, often because of falling enrollment and an increase in tuition discounting. But Jacobson said Y.U. is having a particularly bad time.
“There are certain pressures all colleges face such as how high they can raise tuitions and the government impact on research grants,” Jacobson said. “But at the same time, Yeshiva also has some unique headwinds that not all the other colleges in the sector have.”
The Moody’s report noted that its rating action reflected the university’s limited cash reserves. The university has only $123 million, or 69 days worth of cash, on hand. Y.U. is expected to also, for the second year in a row, break its covenant with a creditor, JP Morgan Chase Bank, by belatedly releasing audited financial results. As a result, JP Morgan can demand accelerated payments on a $75 million loan.
The report also noted, “deep operating deficits driving negative cash flow, and uncertainty regarding the outcome of litigation.”
Moody’s assesses the creditworthiness of bonds. The higher the rating, the lower the likelihood of a default. This, in turn, means lower borrowing costs for the corporate entity in question, since it can obtain credit at lower interest rates.
In a statement released to the Forward in response to an inquiry about the ratings downgrade, Y.U. termed a strong credit rating “of paramount importance” for the school. “We take this opinion by Moody’s very seriously,” the statement said.
Y.U. noted that over the last two years “our undergraduate enrollment numbers have grown steadily…our fundraising efforts continue to improve, and we have made some new additions to our financial management team, including the recent hiring of a new Chief Financial Officer with significant experience in higher education.”
The statement said that Y.U. president Richard Joel and other senior officials at the school “are working together to bring financial stability and health that will ensure the University’s vibrant future.”
As recently as April, 2009, Moody’s gave Yeshiva University a Aa3 rating. Two years later, in June 2011, Y.U.’s rating fell two notches to A2. Two years after that, in July 2013, Y.U.’s credit rating fell a further two rungs to Baa1.
The school’s latest downgrade to Baa2 may not be the end, Moody’s warned in its report. “A [further] downgrade could result if the university is unable to grow internal liquidity or maintain access to external liquidity,” the report stated. “Continued severe operating deficits, financial resources deterioration, or material softening in market demand could also lead to negative rating pressure.”
The report added that “an upgrade or return to a stable outlook is unlikely in the medium term.”
“Confirmation of the Baa2 rating or upward rating pressure could result from our assessment that the university is able to stabilize or improve liquidity, current operating trends improve, and pending legal claims are resolved with minimal financial impact,” the report said.